Charles Schwab Prd B SCHW+B
September 21, 2017 - 5:02pm EST by
north481
2017 2018
Price: 25.38 EPS 0 0
Shares Out. (in M): 17 P/E 0 0
Market Cap (in $M): 425 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • SHUT UP AND TAKE MY MONEY
  • just like free money
 

Description

Among the thousands of securities in existence, there is no doubt that are multiple relatively cheap securities in today’s market. However, the odds of strong, forward-looking total returns are severely stacked against US-centric investors managing diversified portfolios. In direct response to this vacuous market environment - and in a somewhat implicit protest against this environment - I am recommending investing in a simple, yield-only play; Charles Schwab Preferred B (SCHW+B). It’s totally boring, I know. That’s by design.

 

This 6% non-cumulative, no-maturity, income-only security issued by a financially-solid issuer sells for $25.38, provides a current yield of a slightly less than 6%. It is also currently redeemable by Charles Schwab at its par value of $25. Therefore, expect little to no appreciation from here as there will be a discernible gravitational pull toward par value from now on out. My focus is on the 6% preferred dividend.

 

Naturally, the primary downside of most preferreds - and SCHW+B in particular - is a sudden (and even a steady) rising rate environment. This is a long duration, fixed income security, after all. To quantify this risk, since its issuance in 2012, SCHW+B has lived through a couple of periods of sudden long-term rate moves. Both periods produced temporary mark-to-market losses.

 

First, it fell about 15% during the mid-summer 2013 “taper tantrum” that lasted through the end of that calendar year. Next, SCHW+B dropped about 8% from the mid-summer 2016 interest rate low through the end of 2016 immediately following the Trump election victory. This is somewhat par for the course and was largely attributable to interest rate sensitivity, rather than any credit concerns of the issuer. Credit degradation is not a concern of mine.

 

As you know, today’s 10-year sits at about 2.25% and has been trading in a range of 2% to 2.6% for quite a while now. My view is that long-term rates will not rise too much, if at all.

 

This view is due to my bearish tendencies regarding future economic growth. While the Fed is now hell-bent on (slowly) trimming its balance sheet and on (slowly) raising short-term rates, the nine year expansion is absolutely “long in the tooth” and weak, in general. I also agree with others that our economic model has grown highly-dependent on continued low interest rates. My central tendency is to believe that long-term rates will remain in this general vicinity for some time to come. For these reasons, I am not overly-focused on the downside, mark-to-market losses of SCHW+B.

 

In fact, from a relative return standpoint of SCHW+B, my much bigger concern is with this hyper-overvalued market. It almost goes without saying in this forum of quality analysts that the US stock market is wildly overpriced. Buying SCHW+B is a simple method for symbolically opting out of the crazy and getting a positive return delivered into in my hand. There is absolutely nothing fancy going on here with SCHW+B. But, it is what it is, given present conditions.

 

Now, with much trepidation, I will cite very recent evidence of the fact that the US stock market is quite crazy today and worthy of conservatism among investors. This evidence is presented by the mutual fund manager with perhaps the worst decade-long record I’ve ever witnessed, John Hussman. I will offer no deeper explanations at this time and just let the pictures below speak for themselves. From a shorter-term perspective, I am personally paying special attention to the last picture presented.

 

wmc170828d.png

 

wmc170911d.png

 

wmc170828c.png





 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

No catalysts to discuss

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    Description

    Among the thousands of securities in existence, there is no doubt that are multiple relatively cheap securities in today’s market. However, the odds of strong, forward-looking total returns are severely stacked against US-centric investors managing diversified portfolios. In direct response to this vacuous market environment - and in a somewhat implicit protest against this environment - I am recommending investing in a simple, yield-only play; Charles Schwab Preferred B (SCHW+B). It’s totally boring, I know. That’s by design.

     

    This 6% non-cumulative, no-maturity, income-only security issued by a financially-solid issuer sells for $25.38, provides a current yield of a slightly less than 6%. It is also currently redeemable by Charles Schwab at its par value of $25. Therefore, expect little to no appreciation from here as there will be a discernible gravitational pull toward par value from now on out. My focus is on the 6% preferred dividend.

     

    Naturally, the primary downside of most preferreds - and SCHW+B in particular - is a sudden (and even a steady) rising rate environment. This is a long duration, fixed income security, after all. To quantify this risk, since its issuance in 2012, SCHW+B has lived through a couple of periods of sudden long-term rate moves. Both periods produced temporary mark-to-market losses.

     

    First, it fell about 15% during the mid-summer 2013 “taper tantrum” that lasted through the end of that calendar year. Next, SCHW+B dropped about 8% from the mid-summer 2016 interest rate low through the end of 2016 immediately following the Trump election victory. This is somewhat par for the course and was largely attributable to interest rate sensitivity, rather than any credit concerns of the issuer. Credit degradation is not a concern of mine.

     

    As you know, today’s 10-year sits at about 2.25% and has been trading in a range of 2% to 2.6% for quite a while now. My view is that long-term rates will not rise too much, if at all.

     

    This view is due to my bearish tendencies regarding future economic growth. While the Fed is now hell-bent on (slowly) trimming its balance sheet and on (slowly) raising short-term rates, the nine year expansion is absolutely “long in the tooth” and weak, in general. I also agree with others that our economic model has grown highly-dependent on continued low interest rates. My central tendency is to believe that long-term rates will remain in this general vicinity for some time to come. For these reasons, I am not overly-focused on the downside, mark-to-market losses of SCHW+B.

     

    In fact, from a relative return standpoint of SCHW+B, my much bigger concern is with this hyper-overvalued market. It almost goes without saying in this forum of quality analysts that the US stock market is wildly overpriced. Buying SCHW+B is a simple method for symbolically opting out of the crazy and getting a positive return delivered into in my hand. There is absolutely nothing fancy going on here with SCHW+B. But, it is what it is, given present conditions.

     

    Now, with much trepidation, I will cite very recent evidence of the fact that the US stock market is quite crazy today and worthy of conservatism among investors. This evidence is presented by the mutual fund manager with perhaps the worst decade-long record I’ve ever witnessed, John Hussman. I will offer no deeper explanations at this time and just let the pictures below speak for themselves. From a shorter-term perspective, I am personally paying special attention to the last picture presented.

     

    wmc170828d.png

     

    wmc170911d.png

     

    wmc170828c.png





     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    No catalysts to discuss

    Messages

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